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Office disruptor a force to be reckoned with

People & Companies / Latest News

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While the jury may still be out on the long term viability of the co-working office leasing model – market leader WeWork has reportedly recorded a $934 million loss - landlords might nevertheless need to factor in a sizeable co-working component of their offer if they wish to maintain their building’s positioning in a highly competitive marketplace, according to Australia’s largest independent valuer, Herron Todd White.

HTW Director of Office Valuation, Jason Stevens, says that component could be up to 20 per cent, should the current trend maintain its rapid upward trajectory, however that significant commitment could also deliver a form of tenancy insurance.

``Larger landlords will need to consider setting aside a portion of their building for co-working or risk losing tenants to those that do and that could be up to 20 per cent of net lettable area, a figure that may well increase over time.

``On the positive side, landlords who do commit space to co-working may find it presents them with a tenancy insurance policy, of sorts, where any vacancy in the remainder of the building may be filled by business growth within the co-working component.

``Conversely the expansion of a corporate tenant may find short-term sub-let vacancy within the co-working component,’’ Mr Stevens said.

He said in an increasingly tight market, such as we currently have in Melbourne and Sydney, landlords may feel safe in maintaining traditional leasing arrangements.

``But ultimately their building values may face potential negative growth should they fail to keep up with a trend that has seen massive growth in the US,’’ Mr Stevens said.

US based market leader WeWork predicts its ``membership’’ will reach more than 400,000 people by the end of 2018 and, over the course of 2018, expects to open another 200 buildings to take its global footprint to 400 buildings spread across 83 cities and 27 countries.

And, according to reports*, the number of co-working spaces in Australia grew by 297% between 2013-2017, albeit from a low base, occupying 193,190 square metres across six cities. Melbourne had the largest concentration of co-working spaces with 49% followed by Sydney with 38%.

Mr Stevens said commentators* who had cast doubt on the long term viability of the new office leasing model had been another key factor in delaying landlords’ decisions to commit to taking the plunge on co-working tenants.

The backing of high profile investors such as Goldman Sachs, who have been quick to get in on the ground floor of a startup which has seen WeWork rocket in valuation to circa $20 billion in eight short years, has provided landlords with a level of confidence that may overcome any doubts.

However, according to the latest reports, including documents obtained by the Financial Times and Bloomberg, WeWork owes US$18 billion in rent and has recorded net losses of US$934 million. While its revenue has more than doubled to US$822 million, its expenses have also more than doubled to US$1.81 billion.

According to a Wall Street Journal report, another flexible workspace provider, IWG, is valued at around $5,600 for each desk, compared with WeWork’s $135,000 per desk. Demand for IWG space plummeted in the dot-com bust, leaving it with high fixed lease costs and sinking rents from subtenants. Its U.S. business subsequently sought bankruptcy protection.

Mr Stevens said the WeWork experience did not necessarily mean co-working was in trouble but that perhaps WeWork‘s modus operandi needed examination.

``These are obviously still some questions that have put the co-working model under the microscope, as they should, but there is no doubt that the trend to co-working in Australia is well underway, that it could offer some real positives in terms of maintaining full tenancy, and looks likely to continue to forge lasting change in the way the leasing process operates.

``What that means for building values is still emerging. What is clear is that landlords need to ensure they have a ready plan to facilitate their entry into a market which may well be a game changer for commercial leasing,’’ Mr Stevens said.

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